The last time the Fed cut rates against rising inflation was right before the Great Financial Crisis. BofA warns of the ‘Ghosts of 2007’

What’s next?

Nick Lichtenberg is Fortune Intelligence editor and was formerly Fortune's executive editor of global news.

The U.S. Federal Reserve’s looming decision on whether to cut interest rates in September 2025 is sparking heightened concern on Wall Street, as strategists at Bank of America (BofA) Securities draw unsettling parallels to the months preceding the 2007–08 financial crisis. A recent Liquid Insight report, published Aug. 14

At the same time, a separate BofA Global Research note, from the equity and quantitative strategy team, looked at another historical rhyme: between the megacap stocks dubbed the “Nifty 50”—notably Nvidia and other members of the “Magnificent Seven”—and the last time they outperformed the S&P 500 for so many years. (The first Nifty 50 to bear the nickname was a group that ran until roughly 1973, when the game changed for markets because of the onset of the Great Inflation and other factors, including a shift away from the gold standard.)

“Megacaps led for seven years but cracked in July,” wrote the team led

The analysis from Du’s team notes that the convergence of falling policy rates and accelerating inflation is exceedingly rare, occurring just 16% of the time since 1973. Historically, central banks have slashed rates in response to declining inflation, not rising prices. The bank’s concern centers on the potential for rate cuts this year to push the so-called real policy rate—the Fed rate adjusted for inflation—deeply negative. Such a move, the report warns, could further weaken the U.S. dollar, citing striking similarities to 2007, when the Fed’s easing amid supply-driven inflation triggered currency volatility and set the stage for the financial meltdown.

Meanwhile, Subramanian’s team suggested that the Nifty 50 may be giving way to broader market leadership. Historically, Fed easing, particularly during periods of sticky inflation, has triggered underperformance

The notes were written

Market conviction for a September rate cut is now running near certainty, with the probability of a 25 bps reduction at the next Fed meeting nearing 100%. This sharp shift follows disappointing July employment numbers and a string of downward revisions to prior job data. Markets are also betting on at least two rate cuts before year-end and forecast the Fed funds rate to fall below 3%

Du’s team also noted strong parallels in the foreign exchange market, flagging that the U.S. dollar is tracking its weakest year since 1999 and is moving more closely in tandem with 2007 than any other year in half a century. Back then, the dollar’s sharp pre-rate-cut depreciation lingered for months and only reversed as real rates recovered—pain that currency markets may soon reexperience if the Fed proceeds as markets expect. “While the [dollar] is on track for largest year-to-date depreciation since 1999,” Du’s team noted, “the price action in 2025 still has the highest correlation with 2007 out of all years since 1973.”

Subramanian’s proprietary U.S. Regime Indicator, which turned to “Recovery” in July and held steady into August, mirrors previous cycles in which smaller and value stocks led, with high-beta and sector-neutral value factors outperforming the big names

As rates head lower, BofA expects flows to favor value and dividend-oriented stocks, with investor strategies tilting toward Russell 1000 names offering robust but not excessive dividends. Small-cap and value stocks with low P/E ratios and high beta also screen as top performers, in both sector-neutral and unconstrained assessments. Meanwhile, the persistent crowding and high valuations in growth names point to a broadening of opportunities outside megacap growth as risk premiums compress and market leadership tilts.

In summary, BofA’s dual analysis offers both a warning and a road map: The Fed’s imminent rate cut, set against the rare backdrop of accelerating inflation, invokes a historical precedent fraught with risk for the dollar and for financial market stability. Simultaneously, the stage appears set for a major rotation within U.S. equities, away from the megacaps toward broader market segments—a development investors will be closely watching as the Fed’s pivotal September meeting approaches.

If there’s a crash to rival the early 2000s or the Global Financial Crisis of 2008, though, that will be a different story indeed.

For this story, Fortune used generative AI to help with an initial draft. An editor verified the accuracy of the information before publishing.